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Turkey’s last investment-grade rating safe for now

2018-06-12

Turkey’s last remaining investment grade ranking, as issued by Fitch Ratings, is safe for now, according to Paul Gamble, the company’s top emerging Europe analyst.

Fitch will wait until after presidential and parliamentary elections on June 24 to observe how the government implements economic policies before deciding on any credit action, Gamble said, according to BloombergHT, the Turkish franchise of Bloomberg Television.

The ratings agency doesn’t see any political events following the elections that might distract the government from carrying out the necessary measures to strengthen Turkey's economy, he said.

Turkey’s central bank raised interest rates by 425 basis points to 17.75 percent, the highest level in major emerging markets after Argentina, over the past month to stave off an impending currency crisis and help re-balance the economy. The government has stimulated the economy with steps including tax cuts and loan guarantees, raising fears that it was overheating.

Fitch rates Turkey at ‘BB+’, its lowest investment grade rating, with a stable outlook. Standard & Poor’s and Moody’s both rate the country’s debt as junk following downgrades over recent months.

Turkey’s central bank has dealt with “some of the near-term stresses” but there is still uncertainty about political influence over monetary policy, Gamble said.

Turkish President Recep Tayyip Erdoğan told investors in London last month that he planned to lower interest rates and impart more influence over monetary policy following the elections, when a presidential system of government will be introduced in Turkey.

The country also has a long-standing weakness of high inflation, which monetary policy has failed to tackle, Gamble said.

Turkey’s inflation rate is 12.2 percent, about four times the average of major emerging markets. The central bank's target is 5 percent. It also has a current account deficit of about 6.5 percent of GDP, setting it apart from peers.

The government has vowed to tackle high price rises and the current account should it win the elections, though Erdoğan said this week that Turkey would continue to grow its economy strongly.

Turkey has suffered a crisis of confidence among investors from lax monetary policy and because it has not implemented significant structural reforms since an International Monetary Fund loan accord expired in 2008.